19. ANOTHER VERSION: Financial market credit tightened at year end - Fed

Banks tightened the screws on lending to major financial market participants in recent months, the U.S. Federal Reserve said on Thursday, reflecting concerns about Europe's banking crisis. The central bank's survey of senior credit officers did not mention Europe directly, but indicated a "broad but moderate tightening of credit terms applicable to important classes of counterparties over the past three months."

Large financial firms have been under pressure from worries that Europe's political deadlock may eventually lead to some type of sovereign debt default, saddling institutions with massive losses. The Fed said tighter credit terms were especially evident for hedge funds, real estate investment trusts and non-financial corporations. "These responses reflect an apparent continuation and intensification of developments already in evidence in the last survey in September," the report said. Since then, Europe's crisis has engulfed financial markets in a fear of a possible repeat of the fall of 2008, when massive investment bank failures sent an already weak economy into a nose dive.

The European Central Bank's latest attempt to stem the crisis, a 489-billion-euro program of cheap three-year loans for banks, has managed to bring down interbank borrowing costs for now. But few analysts see the situation as sustainable. "I expect (banks) to keep the money in deposits ... because they fear they can run short of liquidity and that they cannot face a bond redemption, (while) deposits are shrinking so they need higher liquidity buffers," ING rate strategist Alessandro Giansanti said.

Indeed, despite being awash with liquidity, banks still appear distrustful and prefer to deposit their money at the ECB's overnight facility rather than lend to each other.